Bargain Stores Find Good Deal to Cheer in Slow Economy

Sagging consumer confidence and a slowing economy typically make retailers nervous. Yet for purveyors of bargains and close-outs such as 99 Cents Only and Pic ‘N’ Save chains, those are just the economic conditions that provide opportunity.

There’s nothing quite like a tight economy to attract bargain hunters, said Eric Schiffer, president of 99 Cents Only Stores Inc., the Commerce-based retailer that opened its 102nd store in Victorville on Thursday.

While other retailers are announcing disappointing earnings, the bargain sector is showing resiliency to the slowing economy.

“We have a lot of consumers out there right now that are conscious of their dollar and are trying to stretch their dollar,” said Michael Potter, chief executive of Consolidated Stores Corp., the Columbus, Ohio, parent of nearly 1,300 close-out stores nationally including Pic ‘N’ Save, Odd Lots, Big Lots and Mac Frugal’s Bargains*Close-Outs.

“We have seen better traffic in the last 10 to 12 weeks than we had in the prior two or three months,” Potter said during a recent conference call.

Last week, Consolidated Stores said its profit from continuing operations rose 6.9% to $68.2 million for the quarter ended Feb. 3, beating Wall Street’s grimmer projections for the company. Sales from continuing operations rose 14% to $1.1 billion. The upswing occurred just as signs of an economic slowdown trickled out. Nonetheless, Potter said Consolidated faces a rough year because of increased costs to switch the corporation and all of its stores to the Big Lots brand name. In December, the company sold its KB Toy division.

In February, 99 Cents Only Stores reported that income from continuing operations rose 7% to $13.2 million in the fourth quarter. Sales rose 17% to $133.8 million in the same period.

Indeed, economic conditions are ripe for these retailers, which buy up lots of surplus and often discontinued merchandise, said Joan Bogucki-Storms of Wedbush Morgan Securities in Los Angeles.

The decline in consumer confidence and shoppers’ firmer grip on their wallets probably will increase store traffic, the analyst said. The woes of many retailers--from Montgomery Wards to Garden Botanika to HomeBase--are sending a steady stream of quality merchandise into the liquidation pipeline. Moreover, some manufacturers are seeing their inventories balloon as the economy slows and are willing to use close-out and bargain stores as a safety valve.

“I saw a bunch of Guess merchandise in a Factory 2-U store that they could never have obtained if Guess didn’t have all the inventory problems it has had recently,” Bogucki-Storms said.

Schiffer said the consolidation in the retail business is evident in the amount of merchandise his company is offered. The 99 Cents Only chain now purchases only about one in 15 items offered by the manufacturers and liquidators that deal with the company, down from one in 10 just a few years ago.

Though they are still well below a high of $55.38 in September, shares of 99 Cents Only Stores have risen 35% this year, closing at $37 Friday. Consolidated shares are up 12% to $11.89. Other big bargain retailers include the 4,000-outlet Family Dollar Stores of Matthews, N.C., up 22% to $26.21, and Dollar Tree Stores Inc. of Chesapeake, Va., with more than 1,700 stores, up 13% to $27.63. Only Dollar General Corp., the Goodlettsvile, Tenn.-based operator of nearly 5,000 stores, is down, off 5% at $17.95.

The roots of the business go back to the “five-and-dime” stores more than a century ago. Retailers such as the old Woolworth chain originally set limits on the price of their goods. At first, the top prices were 5 cents and 10 cents. But with inflation, stores added the 25-cent price and then eventually sold goods for varying prices.

Now the bargain business is dominated by about half a dozen large companies mostly in the Midwest and eastern United States. Some, like Dollar Tree Stores and its rows of $1 goods, still sell most merchandise for a single price.

Visitors walking the aisles of the 99 Cents Only store in Hawaiian Gardens last week would have found an odd assortment of name-brand items such as a 5.5-ounce can of WD-40 spray lubricant and three-packs of 25-ounce Sparkletts water sports bottles and the odd merchandise characteristic of close-out merchants and liquidators, including Spice Girls baseball caps, the CD soundtrack to the 1994 children’s movie “Andre” and boxes of Snyder’s of Hanover pumpernickel and onion pretzels. All of the items were selling for 99 cents.

Like several of the other bargain retailers, Pic ‘N’ Save does not limit its merchandise to a single price. Recent offerings ranged from a 98-cent bottle of Dentist Classic mouthwash to a $99.99 Dirt Devil Vacuum cleaner.

The 99 Cents Only chain is the only major bargain retailer headquartered in California--63 of its stores are in Los Angeles County--and it is among the smallest, though analysts say it has the most growth potential.

Dave Gold, the company’s 68-year-old chairman, developed the concept when he owned a liquor store at the Grand Central Market in downtown Los Angeles. Gold found that he could move slow-selling foreign wines by displaying them under international flags as “wines of the world.” Any bottle in that section sold for 99 cents.

Gold opened his first 99 Cents Only store on La Tijera Boulevard near Los Angeles International Airport in 1982. The chain grew slowly until its public offering on the New York Stock Exchange in 1996, when it started to increase the number of outlets by 25% annually.

Bogucki-Storms, the Wedbush analyst, believes that the chain could grow to 2,000 outlets, including 200 in Southern California. It is now expanding into the Phoenix and Las Vegas markets.

Four of the company’s top five officers--including son-in-law Schiffer--are members of the Gold family. They control about 40% of 99 Cents Only Stores’ stock. Andrew Farina, the chain’s chief financial officer, is the only outsider. The company has no debt and $118 million in cash. The average transaction is $8.50.

What differentiates the 99 Cents Only chain from the other bargain retailers is its emphasis on grocery items and household products.

“We get soups, cookies, snacks, even toothpaste,” said Jennifer Martin of Long Beach, piling cans of Heinz macaroni and beef--two for 99 cents--into her cart. Martin, who has shopped at 99 Cents Only for several years, said she was glad when the Hawaiian Gardens store opened because it was only one bus trip from her home. Previously, Martin rode two buses to reach the Lakewood store.

About 80% of the company’s offerings are everyday consumables, which makes the chain more appealing to customers often better heeled than typical bargain retail shoppers.

Its best-performing store is not far from Beverly Hills in the Museum Row section of Wilshire Boulevard. Annual sales there top $9 million, about double the chain’s average, Schiffer said.

This has prompted the chain to locate many of its new stores in middle-class neighborhoods.

The problem, according to Schiffer, is getting people into stores for the first time. That’s why the company has developed a quirky marketing campaign that plays off the 99-cents theme.

When Schiffer opened the Montebello store in January, he invited Barbara Feldon, Agent 99 of the old “Get Smart” television series. She didn’t show. But the company did have a line for its promotion of 19-inch color televisions for 99 cents to the first nine customers and 99-cent scooters for the next 99.

“You have to overcome the skepticism that there are really bargains,” Schiffer said. “Once they come in, we got them.”

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Bucking the Economy

After missing Wall Street’s expectations for its earnings in the third quarter because of problems at a division that has since been divested, the outlook and stock price for 99 Cents Only Stores Inc. improved as the economy weakened.

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Monthly closes and latest on NYSE

Friday: $37.00, down 20 cents

Source: Bloomberg News